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How to value a business in a Texas divorce

| Mar 2, 2021 | Blog, Divorce |

The effects of a divorce are far reaching and can have a direct impact on every aspect of life. While many people know about the emotional and personal financial impacts of a divorce, the consequences can be even more serious if there is a small, privately owned business involved. Understanding how to assign a value to a small business is an important part of navigating a divorce in Houston, Texas.

The asset approach of business valuation

If the court decides to evaluate the business’s worth based on the asset approach, they will look at the tangible and intangible assets of the business and subtract any liabilities. While it may be simple to put a dollar-value on items such as computers and vehicles, it can be more difficult to assign a monetary value to other assets within the business, including intellectual property. Because of the complexities involved in this sort of valuation, it is a good idea to have annual valuations performed by a business professional. While the courts are not required to abide by these valuations, they will often take them into consideration.

The market approach of business valuation

The market approach compares the business involved in the divorce to other businesses of a similar size that have recently been sold. Obviously, this type of valuation only works if similar businesses have been sold within the last calendar year. This is the least popular option for valuating a business in a divorce because it is often difficult to find comparable businesses.

The income approach of business valuation

If a court uses the income approach to value the business, the judge will look at past revenue in order to project future earnings of the business. The court may use information gathered by industry professionals in order to project future cashflow of the business and assign it a long-term value. This is the most popular form of assigning a value to a business in a divorce.

A business owner who is facing a divorce is encouraged to employ the services of a divorce attorney who is also familiar with their state’s business law. A family law attorney may help their client gather information that can impact the value of their business as assigned by the court.